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Stock Picks

A mid-cap pick with impressive management

Very focused on returns on capital

Down (and betting) on the farm

BY Dianne Maley
Globe Investor Magazine online,
May 11, 2009

The Source: Darrell Anderson, director, Mawer Investment Management Ltd. of Calgary and portfolio manager of the Mawer U.S. Equity Fund.

The Idea: Buy shares of Ametek Inc. (AME-N), which trades on the New York Stock Exchange.

Ametek is one of those mid-cap U.S. stocks that is often overlooked by Canadian money managers. It makes things that measure things - electronic instruments and devices for the aerospace and energy industries, among others.

"The nice thing about them is they have a specialized type of business," Mr. Anderson said in an interview.

What caught his eye was management's practice of allocating capital prudently - even tying their own compensation to this key measure. Says Mr. Anderson: They do a good job of earning a return on capital that exceeds their cost of capital over time. "This is a company that really gets it in terms of focusing on return on capital. The whole concept of wealth generation is absolutely critical for an investment to work out over time. If management is not allocating capital prudently, they're actually destroying shareholder value."

The company also has a solid balance sheet, with debt less than 50 per cent of total capitalization, operating income that is eight times its annual interest expense, and management that has an enviable track record of delivering consistent growth, Mr. Anderson said. Nearly half its revenue is generated outside the United States, so its sales are diversified and it stands to benefit if the U.S. dollar falls.

When the stock market collapsed last fall, Ametek fell to a price Mr. Anderson found irresistible. He started buying in the high $20s. The stock is now trading around $32 (U.S.) on the New York Stock Exchange.

Ametek also has a history of acquiring smaller companies. With private equity firms having trouble raising money for takeovers, and targets falling in value, Ametek, with its solid balance sheet, has the field pretty much to itself, he notes.

The Payoff: A fat capital gain long term. "There's significant potential for the stock price to move much higher over time," Mr. Anderson says. While he hasn't set a target price for it, "We think it's worth a lot more than where it's trading today."

The Big Risk: The main risk facing all companies is economic: the recession could be longer and deeper than expected. A key risk for Ametek is that it might acquire a company that it can't comfortably digest, Mr. Anderson says, "although they've been good at acquiring companies and folding them in."

Why Listen to Darrell Anderson?

Mr. Anderson has been in the investment business for 20 years, having worked previously at Canada Trust and the discount investment arm of the Toronto Dominion Bank.

For the 12 months ended March 31, the fund was down 17.3 per cent, better than many of its peers. In the first three months it was down about 7 per cent, although it recovered a bit in April.

The Mawer U.S. Equity Fund won the 2007 gold award in its category at the 2008 Canadian Investment Awards last year.

On April 28, Mawer Investment Management won the 2008 Lipper Fund Award for the best equity fund family in Canada.

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